Company Website: http://www.sterlingfinancialcorporation-spokane.com
SPOKANE, Wash. -- (Business Wire)

Sterling Financial Corporation (NASDAQ:STSA), (“Sterling”), the bank holding company of Sterling Savings Bank, today announced its operating results for the quarter and year ended December 31, 2011. For the quarter ended December 31, 2011, Sterling recorded net income available to common shareholders of $14.8 million, or $0.24 per diluted common share, compared to $11.3 million, or $0.18 per diluted common share for the quarter ended September 30, 2011 and a net loss attributable to common shareholders of $642.7 million, or $12.79 per diluted common share for the fourth quarter of 2010. For the year ended December 31, 2011, Sterling recorded net income available to common shareholders of $39.1 million, or $0.63 per diluted common share, compared to a net loss attributable to common shareholders of $756.1 million, or $53.05 per diluted common share for the year ended December 31, 2010. The fourth quarter and full year of 2010 periods included non-cash accounting adjustments related to the $730 million capital raise completed in August, 2010 and the subsequent conversion of all of Sterling’s preferred stock to common stock during the third and fourth quarters of 2010, as previously disclosed.

Following are selected financial highlights for the quarter and year ended December 31, 2011:

• Four consecutive quarters of earnings growth.
• Four consecutive quarters of decreasing deposit costs. Deposit funding costs decreased by 6 basis points during the fourth quarter to 0.80 percent, and 33 basis points below the same period in 2010.
• Four consecutive quarters of asset quality improvement. Nonperforming assets declined by $447.2 million, or 55 percent, for the year. Net charge offs were $98.1 million for 2011, representing a decrease of $248.9 million, or 72 percent, for the year.
• Year over year, net interest margin on a tax equivalent basis increased 46 basis points to 3.29 percent.
• Tier 1 leverage ratio was 11.4 percent at December 31, 2011, compared to 11.1 percent at September 30, 2011, and 10.1 percent at December 31, 2010.

Greg Seibly, Sterling’s president and chief executive officer, said, “Our fourth quarter and full year 2011 financial results reflect the continued focused execution on our basic banking strategy. The return to profitability and linked-quarter earnings growth achieved during the year were driven largely by reduced credit-related and funding costs. Despite headwinds to a broad economic recovery and a difficult interest rate environment, Sterling is well-positioned to continue to achieve performance improvement in 2012. We expect this will be driven principally by additional growth in quality loan originations, including fee income opportunities resulting from secondary market sales of multifamily loans, further reductions in credit-related costs as the portfolio de-risking process is substantially concluded, and prudent control of operating expenses.”

Balance Sheet Management

Seibly said, “Our loan production platform continues to gain momentum, as evidenced by growth in new loan originations. During 2011, we originated $1.4 billion in portfolio loans, compared to $474.1 million in 2010. We had notable success in multifamily lending, with portfolio balances expanding by 94 percent from a year ago. This is a lending class where we were able to originate quality loans with attractive risk adjusted returns. In 2012, we will endeavor to expand the momentum of our multifamily platform into other segments of the portfolio.”

Despite solid growth in loan originations described in more detail below, Sterling’s total outstanding loans declined during the fourth quarter of 2011 by $96.3 million, or 1.7 percent, to $5.52 billion. As shown in the table above, $47.0 million of the reduction occurred in construction loans by resolving non-performing loans through foreclosure, note sales and other means. In addition, $49.0 million of the reduction resulted from Sterling’s completion of its first secondary market sale of recently originated multifamily loans. This sale was undertaken as part of Sterling’s portfolio management process and designed to prudently manage credit concentrations at the individual borrower and geographic levels. Sterling expects that similar sales will be undertaken on a periodic basis during 2012 in order to further manage concentration risks, provide an opportunity for generation of fee income and as a source of liquidity.

During the fourth quarter of 2011, Sterling originated $332.0 million of new portfolio loans (which exclude residential loans held for sale), compared to $348.4 million for the linked quarter and $180.3 million for the fourth quarter of 2010. For the year ended December 31, 2011, total portfolio loan originations were $1.37 billion, up 189 percent from $474.1 million for 2010. The most notable increases in originations were in the multifamily portfolio, with $705.9 million of new loans originated during 2011, compared to $29.4 million for 2010. In addition, Sterling increased commercial loan originations, comprised of owner-occupied commercial real estate loans and commercial and industrial (“C&I”) loans, with total originations of $376.1 million for 2011, compared to $131.0 million for 2010.

Sterling’s total deposits were $6.49 billion at December 31, 2011, compared to $6.48 billion at September 30, 2011, and $6.91 billion at December 31, 2010. The decrease during 2011 was principally attributable to Sterling’s strategy to reduce reliance on higher costing time deposits. Retail time deposits were $1.99 billion at December 31, 2011, compared to $2.81 billion at December 31, 2010, representing a decrease of 29 percent. Retail time deposits were replaced with lower costing transaction accounts and savings and money market accounts, which enabled Sterling to reduce deposit costs by 33 basis points during the fourth quarter of 2011 compared to the fourth quarter of 2010. Brokered deposits increased $57.6 million, or 16 percent, during the fourth quarter of 2011 as Sterling obtained $126.0 million of new brokered time deposits, which had attractive interest rates.

Seibly commented, “We continued the concerted effort towards improving the composition of our deposit base. In 2011, our deposit costs were lower in each successive quarter as a result of executing on our core deposit and relationship banking strategy, which we expect will continue into 2012.”

Sterling’s shareholders’ equity totaled $878.6 million as of December 31, 2011, compared with $770.8 million on December 31, 2010. Sterling’s ratio of shareholders’ equity to total assets was 9.6 percent at December 31, 2011, compared with 8.1 percent at December 31, 2010. The increase in equity was due to retained earnings and the change in accumulated other comprehensive income resulting from the change in unrealized gain on investments and mortgage backed securities available-for-sale. As of December 31, 2011, Sterling’s tier 1 leverage ratio was 11.4 percent, and its total risk-based capital ratio was 19.1 percent. This compares to 10.1 percent and 17.5 percent, respectively, as of December 31, 2010.

Sterling's principal operating subsidiary, Sterling Savings Bank, was recently notified by the FDIC and Washington DFI that the previously disclosed Memorandum of Understanding was terminated.

Operating Results

Net Interest Income

Sterling reported net interest income of $71.8 million for the quarter ended December 31, 2011, compared to $74.8 million for the linked quarter and $68.6 million for the quarter ended December 31, 2010. For the year ended December 31, 2011, Sterling reported net interest income of $295.2 million, compared to $284.0 million for 2010.

Total interest income was $97.3 million for the fourth quarter of 2011, compared to $101.4 million for the linked quarter, and $103.8 million for the same period a year ago. The decrease on a linked quarter basis is attributable to lower yields on mortgage-backed securities, which were down by 46 basis points due to increased premium amortization, and to a lesser extent, lower yields on loans, which were down 13 basis points. The decrease from the comparable quarter a year ago is attributable to lower average loan balances and a repositioning of the securities portfolio conducted during the first half of 2011, which was completed to manage interest rate risk.

Interest income reversals on non-performing loans were $5.9 million in the fourth quarter of 2011, compared to $6.0 million in the linked quarter, and $15.5 million in the fourth quarter of 2010. These reversals reduced net interest margin by 27 basis points, 26 basis points, and 63 basis points for these respective periods. During the year ended December 31, 2011, interest income reversals on non-performing loans were $33.8 million, compared to $77.3 million during 2010, reducing the net interest margin by 37 basis points and 76 basis points, respectively.

The lower interest income was partially offset by lower interest expense during the fourth quarter of 2011. Total interest expense was $25.5 million for the fourth quarter of 2011, compared to $26.5 million for the linked quarter, and $35.2 million for the fourth quarter of 2010. Deposit costs were $13.0 million for the fourth quarter of 2011, a reduction of $1.1 million, or 8 percent, from the linked quarter, and down $6.6 million, or 34 percent, from the same period last year, reflecting the improved composition of Sterling’s deposit base. For the year ended December 31, 2011, the total cost of funding was 1.31 percent, compared to 1.69 percent for 2010.

Noninterest Income

Noninterest income includes income from mortgage banking operations, fee and service charges income, and other items such as net gains on sales of securities and loan servicing fees. During the fourth quarter of 2011, noninterest income was $32.9 million, compared to $29.1 million for the linked quarter and $30.8 million for the fourth quarter of 2010. The increase over the linked quarter is largely attributed to a fair value write down on mortgage servicing rights of $5.1 million recorded during the linked quarter and a $1.9 million gain on sales of securities during the fourth quarter of 2011.

Income from mortgage banking operations for the fourth quarter of 2011 was $14.9 million, compared to $16.4 million for the linked quarter, and $20.2 million for the fourth quarter of 2010. The declines in mortgage banking operations reflect lower margins for residential mortgage sales. Margins decreased to an average of 2.43 percent for the fourth quarter of 2011, down from 2.80 percent for the same period a year ago, representing a reduction of 38 basis points.

For the quarter ended December 31, 2011, fees and service charges income contributed $12.2 million to noninterest income compared to $12.3 million for the linked quarter, and $13.6 million for the fourth quarter of 2010. The reduction in fees and service charges income compared to the prior year periods was primarily related to a lower level of non-sufficient funds fees.

For the quarter ended December 31, 2011, other noninterest income included $2.7 million of gains on loan sales, primarily from the sale of $49.0 million of recently originated performing multifamily loans. This compares to $2.7 million of gains on portfolio loan sales for the linked quarter. For the comparable quarter in 2010, other noninterest income included a charge of $11.3 million for the early repayment of FHLB borrowings.

For the year ended December 31, 2011, noninterest income was $126.3 million, compared to $137.0 million for 2010. The decrease reflects lower income from mortgage banking operations due to lower mortgage originations and decreased gains on sales of securities.

Noninterest Expenses

Noninterest expenses were $85.9 million for the fourth quarter of 2011, compared to $86.6 million for the linked quarter, and $107.5 million for the fourth quarter of 2010. The decrease reflects a lower level of OREO operating expenses, which were $4.9 million for the fourth quarter of 2011, down from $10.7 million for the linked quarter, and $24.0 million for the same period last year. Included in noninterest expense for the fourth quarter of 2011 was a $3.5 million charge to establish a reserve for a tentative settlement of a legal claim.

For the year ended December 31, 2011, noninterest expense was $352.4 million, compared to $395.0 million for 2010. The decrease is primarily attributed to lower OREO expenses, which were reduced by $21.1 million, or 34 percent, and lower FDIC premiums, which were down $17.8 million, or 55 percent.

Income Taxes

For the fourth quarter of 2011, Sterling did not recognize any federal or state tax expense, as the income tax expense for the quarter was offset by a reduction in the deferred tax valuation allowance.

Sterling uses an estimate of future earnings and an evaluation of its loss carryback ability and tax planning strategies to determine whether it is more likely than not that it will realize the benefit of its deferred tax asset. Sterling determined that it did not meet the required threshold as of December 31, 2011, and accordingly, a full valuation reserve was recorded against the net deferred tax asset. As of December 31, 2011, the reserved net deferred tax asset was approximately $327 million, including approximately $285 million of net operating loss and tax credit carryforwards.

With regard to the deferred tax asset, the benefits of Sterling’s accumulated tax losses would be reduced in the event of an “ownership change,” as determined under Section 382 of the Internal Revenue Code. During 2010, in order to preserve the benefits of these tax losses, Sterling’s shareholders approved a protective amendment to the restated articles of incorporation and Sterling’s board adopted a tax preservation rights plan, both of which restrict certain stock transfers that would result in investors acquiring more than 4.95 percent of Sterling’s total outstanding common stock.

Credit Quality

The fourth quarter of 2011 marked the seventh consecutive quarter of reduced total nonperforming assets, and at $369.1 million, or 4.0 percent of total assets, total nonperforming assets were at the lowest level since June 30, 2008. During the fourth quarter of 2011, nonperforming assets were reduced by $65.6 million, or 15 percent. Compared to December 31, 2010, total nonperforming assets were reduced by $447.2 million, or 55 percent.

OREO decreased to $81.9 million at December 31, 2011, compared to $111.6 million at September 30, 2011, and $161.7 million at December 31, 2010. This represents decreases of 27 percent, and 49 percent, respectively.

During the fourth quarter of 2011, Sterling recognized lower net charge-offs of $10.7 million, compared to $29.9 million for the linked quarter and $31.4 million for the same period a year ago, representing decreases of 64 percent and 66 percent, respectively.

For the fourth quarter of 2011, Sterling recorded a $4.0 million provision for credit losses, compared to $6.0 million for the linked quarter, and $30.0 million for the fourth quarter of 2010. The reduction in provision for credit losses reflects the improved quality of the loan portfolio and the trend of lower charge-offs. The allowance for loan losses at December 31, 2011 was $177.5 million, or 3.22 percent of total loans, compared to $186.2 million, or 3.32 percent of total loans, at September 30, 2011, and $247.1 million, or 4.39 percent of total loans, at December 31, 2010.

Fourth-Quarter 2011 Earnings Conference Call

Sterling plans to host a conference call January 26, 2012 at 8:00 a.m. PST to discuss the company’s financial results. An audio webcast of the conference call can be accessed at Sterling’s website. To access this audio presentation call, click on the audio webcast icon. Additionally, the conference call may be accessed by telephone. To participate in the conference call, domestic callers should dial 1-517-308-9324approximately five minutes before the scheduled start time. You will be asked by the operator to identify yourself and provide the password “STERLING” to enter the call. A webcast replay of the conference call will be available on Sterling’s website approximately one hour following the completion of the call. The webcast replay will be offered through February 26, 2012.